Capital One Stock Topped The Consensus In Q1, Is It Attractive?

Capital One’s stock (NYSE: COF) has lost 10% YTD, outperforming the 13% drop in the S&P500 over the same period. Further, it is currently trading at $128 per share, which is 24% below its fair value of $168 – Trefis’ estimate for Capital One’s valuation. The company surpassed the consensus estimates in the first quarter. It reported total revenues of $8.2 billion – up 15% y-o-y. This could be attributed to a 10% y-o-y jump in net interest income (NII), followed by a 38% rise in noninterest income. While the NII benefited from higher interest-earning assets, the improvement in the consumer activity levels aided noninterest revenues. That said, the adjusted net income declined 28% y-o-y to $2.3 billion in the quarter. It was due to an increase in total expenses as a % of revenues from 53% to 56% and higher provisions for credit losses.

The company’s top-line increased 7% y-o-y to $30.3 billion in 2021. It was driven by a 5% growth in the NII and a 12% rise in the noninterest revenues. The NII was up due to a higher outstanding loan balance in the consumer banking business. Similarly, growth in the noninterest revenues was because of improvement in the consumer spending levels. Further, the firm reduced its provisions for credit losses from $10.3 billion to -$1.9 billion in the year. This resulted in a more than 4x increase in the adjusted net income to $11.97 billion.

The recent increase in the benchmark interest rates by the Federal Reserve (0.50% on Wednesday and 0.25% in March) is likely to be followed by several rate hikes over the coming months. It is expected to benefit the net interest margin. Further, the recovery in the consumer spending levels is anticipated to drive the noninterest revenues. Overall, Capital One revenues are expected to touch $33.3 billion in FY2022. Additionally, COF’s adjusted net income margin, which increased from 8.3% to 39.3% in 2021, is likely to normalize around 23.6% in 2022, leading to an adjusted net income of $7.9 billion. This coupled with an annual EPS of $19.37 and a P/E multiple of just below 9x will lead to the valuation of $168.

Here you’ll find our previous coverage of Capital One stock, where you can track our view over time.

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